Advertising, Marketing & Promotions Alert >> Gambling and Lottery Risks Are Highlighted by New York City Marathon Lawsuit and Settlement

Advertising, Marketing & Promotions Alert >> Gambling and Lottery Risks Are Highlighted by New York City Marathon Lawsuit and Settlement

December 7, 2016

The filing of a lawsuit against the organizer of the New York City Marathon began in 2016, and the end of this year has seen a proposed resolution of that case. This court action makes it very clear that gambling and lottery law analysis continue to be a core promotion concern.

BackgroundIn January, two Utah residents sued New York Road Runners Inc., the organizer of the New York City Marathon, asserting that the method it used from 2010 to 2015 to select runners to participate in the race was an illegal lottery. The plaintiffs contended that, during those years, runners paid a non-refundable fee of up to $11 each for the opportunity to win a "prize" – the right to run in the marathon. Fewer than 18 percent of the applicants were chosen, and New York Road Runners grossed "millions of dollars" from this "lottery," the plaintiffs alleged.

A proposed settlement of the class action lawsuit was recently reached. Under the proposed settlement, among other things, many applicants will receive a credit that they can apply to entry fees for future races. Moreover, New York Road Runners will donate $100,000 to New York City parks and will pay up to $650,000 for the plaintiffs' attorneys’ fees.

Notably, New York Road Runners specifically agreed that it would increase its disclosures about the process it uses to choose people to run in the race. It also said that, for three years, it would not apply for a license to run a lottery to determine the runners.

The federal district court in New York overseeing the lawsuit has scheduled a fairness hearing on the proposed settlement for February 10, 2017. If the court approves the settlement, the lawsuit against New York Road Runners will end.

The legal issues raised by the lawsuit, however, will certainly continue well into the new year – and beyond.

Other ActionsAs I discussed in my presentation at the 2016 ANA/BAA 38th Annual Marketing Law Conference, the New York City Marathon lawsuit was not an aberration. This year, two other class actions were filed asserting similar claims.

One lawsuit involved the "Game of War" video game, where users spend virtual currency (paid for with real money) in an in-game casino. The lawsuit alleged illegal gaming, but the court ruled that because users only could win more virtual currency, which was not convertible back to cash, users were actually not gambling. In fact, "Game of War" reaped the same profit whether users won or lost.

Another court action involved the video game "Counterstrike," where leagues of professional gamers are watched in real-time. Regular players of the game can buy, trade, or sell extra in-game items for cash. Third-party sites allow players to gamble on the professional matches using these extra in-game items.

The "Counterstrike" case failed on grounds unrelated to the merits, but there may be future challenges that will result in a court ruling resolving the gambling allegations asserted by the plaintiffs.

What Is a Lottery?Generally speaking, an illegal lottery under the law of most states requires the presence of three elements: prize, chance and consideration. Thus, for example, the plaintiffs in the action against New York Road Runners contended that the prize was the ability to run in the marathon, the chance was the random drawing to determine who could participate in the race, and the consideration was the fee charged by New York Road Runners.

The way a promotion is presented can be critical to whether it is perceived as an illegal lottery or a legitimate contest. For instance, if a promotion requires entrants to pay to participate and can be interpreted as a chance promotion, e.g., by using words describing it such as "chance," "win" or "drawing," then it may be hard to argue that it does not violate the law. Importantly, however, the absence of that kind of language does not necessarily protect a premium program – the facts and law will be determinative.

Companies with systems for selecting those who can purchase a ticket or participate in an event also should keep in mind that promotion terms are a contract between the brand and the consumer. Therefore, the terms must be clear and comprehensive, keeping in mind that any ambiguity will be interpreted against the drafter (i.e., the brand). The terms also must be consistent across different media and consumer touch points.

Best PracticesThere are a number of best practices that companies should consider adopting in this context. They include the following:

Companies should not use a past year’s official rules or terms, or simply insert facts into an existing form;

Forms should be carefully read to see if they actually apply;

Knowledge gained from positive and negative lessons should be incorporated into new programs;

Changes in the law and enforcement practices should be considered; and

There should be consistency in what is said in or by all advertising, in-store materials, signage, influencers, bloggers, entry materials, customer service representatives and online FAQs.

The Bottom Line

We can expect more litigation in the coming years concerning whether a business practice is or is not illegal gambling or a lottery. Therefore, all companies and organizations should take the lottery and sweepstakes laws into account when structuring the distribution of anything of value based on chance.